Why Greek Pensions Have Become The Biggest Hurdle In The Bailout Negotiations

By now it has become abundantly clear that the biggest hurdle in the Greek negotiations is the topic of pensions, and specifically whether they should be cut, as the Troika demands, or boosted, as a Greece top court recently did when it reversed a 2012 ruling to cut pensions.

At the heart of this argument is a simple question: is it political, as Greece claims, or simple math, as the IMF and its Troika peers assert.

Earlier today, none other than the Greek PM laid out his "cut demands are political" argument in a short, 134-word statement:

One can only suspect political motives behind the institutions’insistence that new cuts be made to pensions despite five years of pillaging by the memoranda. The Greek government is negotiating with a plan, and has presented nuanced counterproposals.

We will patiently wait for the institutions adhere to realism. Those who perceive our sincere wish for a solution and our attempts to bridge the differences as a sign of weakness, should consider the following:

We are not simply shouldering a history laden with struggles.

We are shouldering the dignity of our people, as well as the hopes of the people of Europe. We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.

We do not have the right to bury European democracy in the place where it was born.

And there you have it: a mere pension cut requirement, one which Greece already agreed to in the past in order to obtain billions in previous funds from the Troika, but never truly implemented, is made into a strawman mountain equivalent to the very fight for survival of democracy in not only Greece, but the entire world.

What is left unsaid is that the simple reason why Tsipras is terrified of cutting pensions as the Troika demands is because he would almost certainly be promptly swept from power as Syriza renegs on its most solemn pre-election vow.

On the other hand, there is the IMF's argument why it is nothing but simple math that Greek pensions should be cut. This is what the IMF's Olivier Blanchard said overnight in an IMF blog post:

... the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms. We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.

Which in turn means that in order to be sustainable (and whatever happened to the IMF's "sustainable" 2022 Greek debt/GDP forecast anyway), Greece has no choice but to cut both wages and pensions.

Only the Greek government knows that such a move would be the start of the endgame, and will lead to either another technocratic government, a puppet of the Troika, or to an even more extremist government, this time from the ideological right.

At the end of the day, unless Greece is ready to take the plunge into economic depression only to pull an Iceland and be a reborn nation after a few years of extreme economic hardship and pain, it will concede, and it will "cut" pensions just to get its latest Troika fix.

When it does, Tsipras will be right, because democracy will have indeed died, a long time ago at that, replaced by an oligarchic elite unaccountable to the people and where only the cold logic of money matters.